A financial goal can seem futile to reach and often competes with your life and needs as it is today. However continuing to shift your awareness to your goals and setting your goals appropriately can help.
You have a financial goal which may include saving for a mortgage, improving your emergency fund or buying a car. However, your financial goal may seem too far away, especially if it is to increase your retirement fund. So, how do you increase your motivation to save? Saving may mean reducing spending on things you enjoy such as eating takeaway, reducing subscriptions and reducing costs on entertainment. Your thoughts may stop you from reducing costs as it may seem that your quality of life today is more important that the future. Another unhelpful thought may be that you probably won't live beyond tomorrow or 65 so why bother. Sitting with your negative unhelpful thoughts is a strategy you can use. Also being aware of your emotions while you apply your strategy to reach your goals will also help. While it can be easier to say rather than do, shifting your awareness back to your goals when you have the urge or thought to spend is important. Chunk your big goal into smaller ones. Give yourself a reward when you reach each smaller goal. As long as there reward is not another expense. Prepare a vision board of your big goal to keep reflecting and remembering on what you need. Remind yourself why you set that goal up. Focus on your needs first before what you want to prioritise. Sometimes you may need support to go through these processes and talk about why it is so difficult. If you need more help to manage your emotions, motivation and thoughts in a safe non-judgemental environment, then we can help through financial therapy sessions. Disclaimer: The information provided above is not financial advice but intended for general information only. If you need help with improving your financial literacy and support to improve your financial behaviour and mental health, contact us today. For specific financial advice you can reach out to a financial planner.
0 Comments
Mental accounting is a psychological framework that can be used to manage money. Mental accounting can be used physically by keeping seperate bank accounts, money jars, or mentally by thinking about the separate accounts. For example you may have one bank account but in your mind you plan to save 10% and the rest on incidental costs and bills.
Mental accounting also involves the opening of an account and closure and can help with money management as it is a form of self-control. You put money in and receive mental closure but spending it. You know how much is to go in a particular account and what for. It can also help you be aware of your finances as the money is contained in certain accounts. Furthermore there are different schools of thought on how many accounts to hold your money. They range from three to six and include one for bills, one for holidays, one for an emergency, another for investment and another for giving to others such as charity. People use this practice to teach children about money management and for adults to improve self-control and manage debt. Mental accounting can also be used for investors or financial planners to compartmentalise money during diversification for an investment strategy such as placing money into Australian and international shares, property, cash and fixed interest, bonds and managed funds. It can also be used when investing in shares to assist with diversification further by splitting money into categories of a variety of companies such as utility, REITS, mining and healthcare. Give mental accounting a go to help with money management and self-control. Gambling addiction affects people of any gender and any age and in any socioeconomic status. Gambling is a behaviour that involves a decision to eventually win a prize after many attempts of spending money that may belong to the gambler or not. Gambling can be a form of impaired decision-making and can also a result from a negative life experience. Gambling addiction is now known as gambling disorder in the Diagnostic and Statistical Manual, fifth edition (DSM-5) under the non-substance behavioural addiction section. Symptoms need to result in clinical impairment of distress within the following 12 month period and include four or more of the criteria listed in the manual. The criteria includes but not limited to lies to hid the problem, feeling restless when trying to cut gambling and needing to gamble to increase money or achieve a desired level of excitement. Some people gamble to express their anger, have a negative relationship with money as they were told money was more important than them or want a sense of belonging. Risk factors also include a lack of family cohesion, loneliness, financial hardship and using gambling to mitigate it, impulsive personality where there is a lack of self control to manage the urge, high sensation-seeking behaviour, and a lack of coping strategies to manage life challenges. Therefore, there are many complex factors to consider when helping someone with gambling addiction. Coping strategies to manage problem gambling include counselling to work through past trauma, experimenting with healthy coping strategies, improving financial literacy to learn about and appreciate healthy money management including planning for your financial future, improving relationships around you to develop a healthy sense of belonging, improving what money means for you as well as facing your problems and working it out. Personality can drive financial decision making and behaviour in finance. As a financial planner, understanding a client's personality can assist in the client discovery process. As a client, understanding your own personality can help you re-evaluate your risk profile, learn about your strength and weakness in money management and how to connect with the advisor. One perspective to consider when measuring personality is the Five Factor Model. The Five Factor Model includes openness to experience, conscientiousness, neuroticism, extraversion and agreeableness. A person can be within the spectrum of high and low of each factor. The Five Factor Model is useful as it can transcend cultures and languages and therefore support a diverse range of clients. It is also a valid and reliable self-report measure.
Personality tests will measure individual differences that can help understand how people think and behave. Theory can influence how personality is developed. For example, there is the biological theory where hormones or chemicals in the brain influences personality, then there are genes and the psychosocial theory where attachment and social relationships develop personality. There is also the self-regulation perspective where prior intentions influence behaviour and cognitions drive personality. While there are many theories it makes sense that each one has merit and suggests that personality can be stable when considering the genes but also change when considering psychosocial and self-regulation theory. A financial planner can understand a client's behaviour by using a personality test such as the Five Factor Model otherwise known as the Revised NEO Personality Inventory. For example, a client who is agreeable may not express his or her preferences as they want to be liked and don't want to offend others. The client may walk away with advice that does not meet their needs. To mitigate this problem, the planner can ask the client more questions to ascertain a deeper understanding of the client's needs. A client who is conscientious may be overconfident in their capacity to manage finance or may believe they have a high tolerance to risk. If a client scores high in neuroticism it may mean that they are overly anxious. You would then provide more information to help the client feel comfortable with the advice so they can make the right decision. You may also provide enough information in the Statement of Advice, which in turn will enable to client to hire you as they will feel supported. A limited Statement of Advice may not be sufficient. If a client scores high in openness to experience which correlates to intellect, they will ask more questions and may even know more than other clients. If you don't allow the client to ask the questions and become irritated, you may lose their business. However, a client who is high in agreeableness won't ask questions as they will worry that they are bothering you or may agree with everything you say while deep down inside are really not happy with the advice but will have trouble speaking up. However, that doesn't mean they are low in conscientiousness. They may be knowledgeable but want to be polite and not ask too many questions. A client who is low in agreeableness may complain a lot, become upset and seem rude as they are not overly concerned about being polite. If you knew early enough you can work with it but adjusting how you communicate. A personality test can allow you to gain enough insight to manage your advise that is supportive and in the best interest of your client. A person who is high in conscientiousness can learn that their strength is to seek knowledge, but if they are also high in neuroticism can learn how to manage their anxiety in money management and risk. If they are high in extraversion in the excitement-seeking facet, they may need to manage how they invest as it can influence decision making to seeking excitement rather than using a rational objective approach. In summary, a personality test such as the valid and reliable NEO Personality Test can give you a deeper insight into providing supportive advice to your clients and enable you to keep them longer by ensuring they feel understood. It can also provide those who want to manage their own money insight into their own behaviour to make better decisions. Australia is soon entering a new year of ‘living with COVID’ and it’s promising to see a number of Australians are currently seeking advice from a professional financial planner or through a digital platform. Financial Planning Week is the perfect time for you to think ahead and create a plan to improve your financial wellbeing – now and into the future.
#FPWeek2021 You can find a financial planner here www.fpa.com.au Superannuation is mandated for people who are employed, yet for people who are self-employed they have a choice to place a certain percentage of their income into superannuation. Under the Superannuation Guarantee percentage, the employer must place 10% of the employee's income into a superannuation fund. To increase security in retirement a person may decide to increase their retirement fund through investment strategies such as property development, shares, bonds and savings account.
It is never too late to save for retirement. However you will need to set healthy goals and scale back spending to put extra money into a diversified investment strategy. Delayed gratification is required to be able to put extra money into your retirement plan which may be challenging for some people. Delayed gratification means waiting for what you want later. In order to save more you need to spend less. You may see people who are wealthy or better still who look wealthy. There are people who have a lot of stuff including bad debt. Delaying gratification requires you not to look at what other people have but what you know is best to do for yourself. Delaying gratification also requires self-regulation strategies. You need to manage your anxiety of not having, your thoughts of wanting things such as an expensive holiday or feelings of jealousy of others. You may do this by determining your goals for retirement, what you value, and then work backwards on how to reach the goals. Researchers Hastings and Mitchell (2020) identified that financial literacy can improve people's motivation to save for retirement as the largest factor is a lack of understanding about finances and the economy that causes an inability to delay gratification for retirement planning. Time discounting or temporal discounting is another strategy where you benefit more if you wait. If you prime yourself through visualisation of the benefits you will receive in the future, you will increase your changes of delaying gratification and a secure retirement. For example, you visualise your holidays, spending valuable time doing hobbies you always wanted to do and relaxing leisure time during retirement. The visualization allows you to realise that the long-term savings is beneficial and more important than short term gains. You de-emphasise immediate gain, and emphasise future gain. In summary, write down what you want your life to look like when you retire, visualise it often by thinking about it and what it would feel like, and then you won't mind spending less to save more for retirement. On the other hand, spend time to learn about finances and the economy to improve your ability to have a more secure retirement through a diversified investment strategy and healthy budgeting. Cheng, Ying-Yao, Paichi Pat Shein, and Wen-Bin Chiou. “Escaping the Impulse to Immediate Gratification: The Prospect Concept Promotes a Future-Oriented Mindset, Prompting an Inclination Towards Delayed Gratification.” The British journal of psychology 103.1 (2012): 129–141. Web. Hastings, J., and Mitchell, O.S. “How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.” Journal of pension economics & finance 19.1 (2020): 1–20. Web. Book IV: Saving and investing - chapter 3: Saving for retirement (2009). . Hoboken: John Wiley & Sons, Inc. Retrieved from https://login.ezproxy.lib.rmit.edu.au/login?url=https://www-proquest-com.ezproxy.lib.rmit.edu.au/books/book-iv-saving-investing-chapter-3-retirement/docview/189246727/se-2?accountid=13552 Financial literacy is teaching about finance. It includes teaching how to budget, investment strategies, retirement planning, estate planning, debt management and compounding.
Once you have knowledge about finance you then may need support to help improve your decisions around how to spend and make money. For example, hoarders have trouble with acquisition of goods and people who spend less time with their family and work too hard may have trouble with enmeshment with money. Your life experiences, your past, your attitude, your knowledge about finance, motivation, stage of change, and your life stage can influence your decision making in how you accumulate wealth and spend. Give yourself the time and space to get to know about finance and what gets in the way of have a better relationship with money. Young adults are in a position to save for their future but sometimes lack the financial literacy, which in turn can affect their confidence in accumulating wealth and becoming more independent in life.
Dwyer, McLeod, and Hodson have conducted research about this topic and found that young adults have a different perspective on debt. For example, some focus on credit being necessary and creates opportunity while others perceive that credit will inhibit future achievements and cause a sense of powerlessness. Debt is known to be class stratified, according to authors Dwyer, McLeod and Hodson. For example people with a lower income use debt to cope and people with a higher income use debt to attain wealth. There is good debt and bad debt. Good debt is used when the goods appreciate and bad debt is when the goods depreciate. Researchers suggest that some people have increased self-esteem and self-concept due to debt as it is a source to invest and reach financial wealth. However, if a person has a lack of financial literacy can use debt incorrectly, that can lower their self-concept and self-esteem. Therefore, the concept of a person having a sense of mastery over debt and confidence in debt and overcoming it can depend on their perception, which may be influence by the socio economic status. Researchers Dwyer, McLeod, and Hodson identified that young adults experience debt positively as it makes them feel in control of their money and gives them higher levels of self-esteem. Moreover, wealthy young adults don't experience negative effects on the self-concept when in debt as they have more options to manage it. Debt affects young people differently, depending on their social status and options available. For example, a person with low income and bad credit won't be able to find a loan with lower interest or consolidate their loans, while a person with high income may have those options. A person with high income may be able to fix their credit rating and have more options available. These outcomes influence sense of mastery and self-esteem. The outcome means that there are several variables to consider when thinking about how a person feels about debt. Source: Dwyer, R.E., McCloud, L., & Hodson, R. (2011). Youth debt, mastery, and self-esteem: Class-stratified effects of indebtedness on self-concept. Social Science Research, 40, 727-741. Financial circumstances affect your mental health and your ability to improve your financial circumstances can depend on your helpful or unhelpful thoughts. For example, some people are more dependent and don't value being financially dependent but people around them struggle as they feel it is a burden.
As well as focusing on the quality of your thoughts it is also important to have a good level of financial literacy to improve confidence (not over confidence) and empowered to make the right decisions for yourself and know which services to access to help you along your journey. What is your psychology about money? Do you enable others to be dependent on you? Do you struggle to save? Do you struggle to overcome gambling issues? Do you have anxiety and depression over financial stress? Financial wellness is important in helping you on your journey to improving your financial circumstances. Improving your financial literacy as well as the psychology of money can be the platform you need to start improving your ability to live the life you want. Behavioural finance is an important aspect to consider when learning about investment decision making and wealth management as it helps us understand the how bias can influence success and failures.
Financial crisis often has an impact on our bias just as any crisis. The brain holds onto negative situations more than positive ones. Think about any negative situation in your life and how your may ruminate on it more than good memories. Therefore, looking back at decisions you made in finance and thinking about how bias will impact on what you notice can improve discernment and what you see. The behaviours to watch in any situation and especially a crisis is when fear and greed influences decisions. Behavioural portfolio theory states that fear and greed influences investors decisions. Fear can cause the investor to diversify their portfolio in investments that are low in risk and low in savings while greed can influence investors to diversity heavily in high risk investments in the hope of high returns. As a result fear can cause investors to sell shares when a crisis hits as it is high risk. However, this activity may not be helpful if your long term goal is to improve your retirement plan. So while you notice the crisis around you and your emotions also consider your goals in your investment strategy. While attitude influenced the 2008 financial crisis, the financial crisis in 2020 was caused by a different nature. However, attitude can influence how you manage it. While emotions can guide life, you also need to look at your strategy which would include your goals and objectives to make informed decisions when investing. If your investment strategy is to retire well, then you need to consider your long term goals, alternatively if it to live on then it would be a short term strategy. |
AuthorArticles about mental health, money and behavior Archives
February 2024
Categories
All
|